By Sri K v. Aravind, Advocate

IN THE HIGH COURT OF KARNATAKA AT BENGALURU Dated this the 3[rd]day of February, 20195— PRESENT THE HON’BLE MR. JUSTICE N KUMAR. ANT) THE HON’BLE MR. JUSTICE B VEERAPPA| ITA No. 448/2009 BBRITIWEM/s. Lakshmi Stone Crushing IndustriesMuduganoorArakalgud TalukHassan District.Karnataka |Represented by its Partnerori M. C. RangaswamyAged about 54 yearsson of Sri M. J. Thimmegowda.. Appellan(By Sri 8S. Parthasarathi & Ms. Jinita Chatterjee,Advocates)ANT)The Income Tax OfficerWard-2,Hassan...Respondent ...Respondent (By Sri K. V. Aravind, Advocate) This ITA filed under Section 260-A of I.T. Act, 1961.arising out of order dated 15-05-2009 passed in ITA|No.394/BNG/2008, for the Assessment year 2003-04,|praying to (i) formulate the substantial question of law statedtherein; (11) allow the appeal and set aside the order passed|by the ITAT Bangalore in ITA No.354/BNG/2008, DATED|15-05-2009. This ITA coming on for hearing this day,N. KUMAR J.,delivered the following: JU DBGMENT The assessee has preferred this appeal against the|order passed by the Tribunal which has refused to interferewith the order passed by the lower authorities completingthe assessment on the assessee as an Association oftPersons. 2. The assessee is engaged in the business of stone|crushing and hire of tractors and tippers. The assessee filed its return of income on 18.7.2005 in respect of theassessment year 2003-04 declaring an income of Rs.7,296/-in the status of firm under the head income trom business.since the return of income was filed beyond the timeprovided under Sections 139 (1) and 139(4) of the IncomeTax Act, 1961 (hereinafter for short referred to as ‘the Act), anotice under Section 148 of the Act was issued on 18.8.2005to regularize the proceedings. On receipt of the said notice,the assessee filed a return. Subsequently, it was found thatthe assessee has not filed the certified copy of thepartnership deed along with the return of income filed. Theassessing authority proposed to invoke the provisions ofsection 184 (5) to treat the status of the assessee as AOP asagainst its claim as firm. The assessee by his letter dated4.12.2006 objected to the proposal and also filed a copy ofthe partnership deed duly certified by all the partners.Thereafter, the assessment was concluded on 15.12.2006under Section 143 (3) read with Section 147 of the Act. Theassessing authority declined to accept the explanation of the assessee and held the assessee in the status of AOP andconcluded the assessment. While doing so, the assessee’sclaim towards payment of interest on capital debited into theprofit and loss account to the tune of Rs.2,61,127/- andsalary to the partners as claimed by the assessee to theextent of Rs.65,661/- were disallowed. In addition, therewere other disallowances like disallowance of 25% of HSD|oil, machinery and vehicle maintenance, telephone expensesandbonus|paymentTOtheTUNEoT Rs.18,376/-.Consequently, an income of Rs.4,12,230/- was determinedon which tax was levied besides interest under Sections234A, 234B and 234C of the Act. | 3. Aggrieved by the said order, the assessee preferred|an appeal to the Commissioner of Income Tax (Appeals). TheAppellate Authority without proper consideration of thearguments and the documents produced dismissed theappeal and upheld the order of the assessing authority. 5 4. Aggrieved by the said order, the assessee preferred| a second appeal to the Tribunal. The Tribunal alsodismissed the appeal, affirming the findings recorded byboth the authorities. It is against the said order, the presentappeal is filed. Oo. This appeal was admitted to consider the following|substantial questions of law on 19.12.2009:- 1.Whether in the circumstances, the Tribunalwas justified in passing the ex-parte orderwithout affording an opportunity to theappellant while denying the status of the|Appellant as afirm?| 3. Aggrieved by the said order, the assessee preferred|an appeal to the Commissioner of Income Tax (Appeals). TheAppellate Authority without proper consideration of thearguments and the documents produced dismissed theappeal and upheld the order of the assessing authority. 5 4. Aggrieved by the said order, the assessee preferred| a second appeal to the Tribunal. The Tribunal alsodismissed the appeal, affirming the findings recorded byboth the authorities. It is against the said order, the presentappeal is filed. Oo. This appeal was admitted to consider the following|substantial questions of law on 19.12.2009:- 1.Whether in the circumstances, the Tribunalwas justified in passing the ex-parte orderwithout affording an opportunity to theappellant while denying the status of the|Appellant as afirm?| D2 Whether the Appellant having filed the copyof the partnership deed duly signed by all|the partners well before the conclusion of)the.assessmentandtheassessmenthaving been passed under Section 143(3)read with Section 147 of the Act, the) ? Tribunal was justified in upholding the denial of status as firm in the case of the) Appellant? 3.|Whether in law, the Tribunal was right in|affirming the status of the appellant as| AOP as done by the assessing officer in theassessment for the relevant assessmentyear? 6. SriS. Parthasarathi, the learned counsel appearing|for the assessee assailing the impugned order contendedthat, on failure to comply with the requirements of Section144 of the Act, when proceedings were initiated undersection 147 of the Act, a notice under Section 148 of the Actcame to be issued. In pursuance of the said notice, theassessee filed a return. In the course of assessmentproceedings, the assessee also produced a duly certifiedpartnership deed. In spite of the compliance with theaforesaid requirements, the authorities were not justified in C passing an order under Section 184(5) treating the assesseeas AOP and then refusing to give deductions by way ofpayment of interest, salary and other legitimate expenses towhich the assessee is entitled to under Section 28 of the Act.EKlaborating the argument he contends that, once a return isfiled in pursuance of notice under Section 148 of the Act, thelegal effect is, the provisions of the Act shall so far as maybe, apply accordingly as if such return or a return requiredto be furnished under Section 139 of the Act and, therefore,the default contemplated under Section 144 (1)(a) 1s wipedout. Secondly, on the ground of failure to comply with therequirement of Section 144 of the Act, the assessee may notbe continued the benefit of deduction under Section 28 in sofar as a partnership firm is concerned and, therefore, hesubmits a case for interference is made out. 7. Per contra, Sr K.V. Aravind, learned counsel|appearing for the revenue supporting the impugned ordercontended that, though on filing of a return in pursuance ofa notice under Section 148, the said return is treated as a return furnished under Section 139. It is not for allpurposes. The word used is ‘so far as may be’. Therefore,when admittedly Section 144 of the Act is not complied with,the consequences which are enumerated in Sections 184 (5)and 185 automatically applies and, therefore, denial ofdeductions under Section 28 of the Act is valid and cannotbe found fault with. Therefore, he submits that a case forinterference is not made out. 8. Section 139 of the Act provides that, every person,being a company or a firm or being a person other than acompany or a firm, shall, on or before the due date, furnish areturn of his income in the prescribed form and verified in the prescribed manner and setting forth such otherparticulars as may be prescribed, if his total income isassessable under the Act during the previous year exceededthe maximum amount which is not chargeable to income-tax. Explanation (2) to Section 139 explains the meaning ofthe word “due date” prescribed in different dates as the last 8. Section 139 of the Act provides that, every person,being a company or a firm or being a person other than acompany or a firm, shall, on or before the due date, furnish areturn of his income in the prescribed form and verified in the prescribed manner and setting forth such otherparticulars as may be prescribed, if his total income isassessable under the Act during the previous year exceededthe maximum amount which is not chargeable to income-tax. Explanation (2) to Section 139 explains the meaning ofthe word “due date” prescribed in different dates as the last date for filing the returns in respect of a company, a firm anda person. Section 139(1), 139(4) and 139(5) provides for filing|of returns on different dates. Section 144 (1) of the Actprovides for best judgment assessment. If any person fails tomake the return required under sub-section (1) or (4) or (95)of Section 139 or fails to comply with the terms of a noticeissued under sub-section (1) of Section 142 or having madea return fails to comply with all the terms of a notice issuedunder sub-section (2) of Section 143, then the assessingauthority after taking into account all relevant materialwhich is gathered by him after giving a notice to the assesseean opportunity of being heard make the assessment to thebest of his judgment and determine the sum payable by theassessee on the basis of such assessment. 9. Section 147 of the Act provides for initiation of|proceedings in respect of income escaping assessment.However, Section 148 makes it clear that, before making theassessment, reassessment or recomputation under Section147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as maybe specified in the notice, a return of his income, in theprescribed form and verified in the prescribed manner andsetting forth such other particulars as may be prescribed.Once such a return is filed provisions of the Act shall, so far|as may be, apply accordingly as if such return were a returnrequired to be furnished under Section 139. 10. Chapter XVI of the Act provides for special|provisions applicable to firms. Section 184 deals withassessment of a firm. It provides that, a firm shall beassessed as a firm for the purposes of this Act, if (1) the|partnership is evidenced by an instrument ; and (ii) theindividual shares of the partners are specified in thatinstrument. In proof of the assessee being a firm, sub-section (2) provides that, a certified copy of the instrument ofpartnership shall accompany the return of income of thefirm. Sub-section (5) of Section 184 prior to amendment,i.e., prior to 1.4.2004 provides that, if such a firm has failedto comply with the requirement of Section 144, then the firm| shall not be assessed as a firm but it shall be assessed in thesame manner as an Association of Persons. Similarly,section 185 prior to its amendment with effect from 1.4.2004provided that, if the assessee firm does not comply with the|provisions of Section 184, then the firm shall be assessed forthat assessment year in the same manner as an Associationof Persons. By Finance Act, 2003 which came into effectfrom 1.4.2004, sub-section (5) is substituted. Thesubstituted provision now provides that, if the assessee firm|fails to comply with the requirement mentioned in Section184, the firm shall be so assessed that no deduction by wayof any payment of interest, salary, bonus, commission orremuneration, by whatever name called, made by such firm|to any partner of such firm shall be allowed in computingthe income chargeable under the head “Profits and gains ofbusiness or profession” and such interest, salary, bonus,commission or remuneration shall not be chargeable toincome-tax under clause (v) of section 28. | 12 12 11. Therefore, once there is non-compliance of Section|144, though the assessee firm is assessed as a firm, it shall|not be entitled to the deduction which are allowable inrespect of a firm as provided under sub-section (95) of Section28 of the Act. Similarly, the substituted provision Section185 provides that, if the firm does not comply with theprovisions of Section 184, namely non-furnishing ofpartnership deed along with the return, then the firm wouldagain be not entitled to the benefit of deduction allowable in respect of a firm as provided in clause (v) of Section 28 of theAct. 12. Now, the question for consideration is, when.admittedly the assessee has not complied with the|requirement of Section 144 and when he files a return inpursuance to the notice issued under Section 148 and whensuch return is to be treated as a return filed under Section139, still is the assessee not entitled to the benefits ofdeduction allowable to a firm as provided under clause (v) ofSection 28 of the Act. All the three authorities have held 13 relying on the judgment of the Kerala High Court that,though the return filed in pursuance of a notice undersection 148 is treated as a return filed under Section 139, itwould not have the effect of wiping out the failurecontemplated under Section 144 of the Act. Though theassessee would be assessed under the Act as a firm, but thebenefits flowing to a firm as per clause (v) of Section 28 isnot available to the assessee in view of sub-section (5) ofSection 184 of the Act. | 13. In this regard it is necessary to interpret sub-section (5) of Section 184 of the Act. It reads as under: -— “184(5)Notwithstandinganythingcontained in any other provision of this Act,where, in respect of any assessment year,there is on the part of a firm any such failureas is mentioned in section 144, the firm shallbe so assessed that no deduction by way of|any payment of interest, salary, bonus,commission or remuneration, by whatevername called, made by such firm to any partnerof such firm shall be allowed in computing the 14 income chargeable under the head “Profits andgains of business or profession” and suchinterest,|salary,bonus,|commissionOTremuneration shall not be chargeable toincome-tax under clause (v) of section 28.” 14. A reading of the said provision makes it clear that,if there is a failure on the part of the firm, as is mentioned insection 144, then the firm shall be so assessed that nodeduction as contemplated in the said provision read withclause (v) of Section 28 is allowable to the said firm. That isthe plain meaning of the said Section. Similarly, Section 185provides that, if a firm does not comply with the provisions ofsection 184, same consequences would follow. Sub-section(5) of Section 184 deals with non-compliance of Section 144and Section 185 deals with non-comphance of Section 184.In fact, the Kerala High Court in case ofRADHA PICTURE PALACE vs DEPUTY COMMISSIONER OF INCOME TAX [344 ITR 274]has categorically held as under:- 14. A reading of the said provision makes it clear that,if there is a failure on the part of the firm, as is mentioned insection 144, then the firm shall be so assessed that nodeduction as contemplated in the said provision read withclause (v) of Section 28 is allowable to the said firm. That isthe plain meaning of the said Section. Similarly, Section 185provides that, if a firm does not comply with the provisions ofsection 184, same consequences would follow. Sub-section(5) of Section 184 deals with non-compliance of Section 144and Section 185 deals with non-comphance of Section 184.In fact, the Kerala High Court in case ofRADHA PICTURE PALACE vs DEPUTY COMMISSIONER OF INCOME TAX [344 ITR 274]has categorically held as under:- “The object of Section 184(5) ts such that onlyASSESSECES,who complywith the statutoryprovisions which include filing of regular returnsin tume and co-operating with the Department bycomplying with the terms of notices issued underss. 142, 143(2) are entitled to the benefit ofdeductions. All what s. 148 conveys is thatreassessment under s. 147 based on the returnfiled pursuant to notice issued under the saidsection should be completed in the same way aregular assessment is completed based on areturn filed under s. 139 (1). However, it cannotbe said that an assessee, who filed a returnbased on notice issued under s. 148 1s notinvolved in any of the failures referred to in Ss.144(1) which the assessee admittedly hascommitted inasmuch as the assessee has notfiled a regular return under s. 139. The verypurpose of introducing a fiction in s. 148 is thatbut for the fiction available therein, a return filedagainst notice issued under s. 148 cannot betreated as a regular return under s. 1939.However, filing of return against notice issuedunder s. 148 itself is not the same as filing areturn under s. 139 of the Act. So much so, 16 failures referred to in s. 144(1) are absolute|failures which cannot be remedied by filing|returns based on notice under s. 148 of the Act.” 15. In fact, this Court in the case ofCOMMISSIONER OF INCOME TAX vs SRI HUKMICHAND AND COMPANY, ITA No. 4/2004dealing with a case where the assessee wasprecluded from filing a return within the due date under|Section 139 otf the Act because the assessee’s books wereseized by the APMC authorities held that the failure to|comply with the requirement of Section 144(1) of the Act wasnot intentional, beyond their control and, therefore, they|cannot be denied the benefit of deduction under Section 28|ot the Act. 16. The interpretation placed by the Kerala High|Court in view of the words used in the Section cannot be'found fault with. But, the Central Board of Direct Taxes|explaining the substance of the provisions of the Act which|are brought on the statute book by virtue of the Finance Act,2003 has issued Circular No. 7/2003. At para 66 they were 17 dealing with Rationalization of provisions relating toassessment of firms. It reads as under:- | 66.1]Under|the|existing provisioncontained in sub-section (5) of Section 1854,where, in respect of any assessment year, thereis on the part of a firm any such failure as ismentioned in Section 144, the firm shall beassessed in the same manner as an associationof persons, and all the provisions of the Income-tax Act shall apply accordingly. 66.2 Further, the existing provisions of Section185 provide that in case a firm does not complywith the provisions of section 184 for anyassessment year, the firm shall be assessed forthat assessment year in the same manner as anassociation of persons, and all the provisions ofthis Act shall apply accordingly. 66.3WithOmVIEWTorationalizetheprovisions relating to assessment offirms, the Act)has substituted Sub-section (5) of Section 154and Section 185 so as to provide that in case afirm does not comply with the other provisions of 18 66.2 Further, the existing provisions of Section185 provide that in case a firm does not complywith the provisions of section 184 for anyassessment year, the firm shall be assessed forthat assessment year in the same manner as anassociation of persons, and all the provisions ofthis Act shall apply accordingly. 66.3WithOmVIEWTorationalizetheprovisions relating to assessment offirms, the Act)has substituted Sub-section (5) of Section 154and Section 185 so as to provide that in case afirm does not comply with the other provisions of 18 section 184 or a best judgment assessment ismade in the case of the firm as referred to insection 144, no deduction by way of anypayment of interest, salary, bonus, commission orremuneration, by whatever name called, made bysuch firm to any partner of such firm shall beallowed in computing the business income of thefirm. Such interest, salary, bonus, commission orremuneration shall not be chargeable to income-tax under clause (uv) of Section 28 of the IncomeTax Act. 66.4These amendments will take effectfrom I[St]April, 2004 and will, accordingly, applyin relation to the assessment year 2004-05 andSubsequent years.” 17. Paragraph 66.3 makes it clear that, thesubstituted Sub-section (5) of Section 184 and Section 185intends to provide that in case a firm does not comply withthe other provisions of Section 184 or a best judgmentassessment is made in the case oft the firm as referred to insection 144, no deduction by way of any payment of interest,salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firmshall be allowed in computing the business income of thefirm. In sub-section (5) of Section 184, there is no mentionabout best judgment assessment. What is provided therein isfailure as mentioned in Section 144. On failure to complywith the requirements of Section 144, the assessingauthority is vested with the power to pass a best judgmentassessment. The said best judgment assessment would bepassed by the assessing authority due to non-cooperation ofthe assessee and, therefore, as a consequence the assesseeis deprived of the deductions enumerated in the saidprovision. Now, that the explanation given by the CBDTto |sub-section (5) of Section 184, they have introduced arequirement of a best judgment assessment as a conditionprecedent for denying the benefit of deduction. Mere non-compliance of Section 144 would not deprive the assesseethe benefit of deduction under Section 28. No doubt the saidexplanatory note includes words which are not found in thesection. Therefore, the learned counsel for the revenue contended in the first place that, Circular No.7/2003 is notissued in terms of Section 119 of the Act, as such it is not.enforceable. Secondly, he contended that the explanationoffered by the CBDT runs counter to the express provisionscontained in the statute in which statutory provisions shouldprevail. Therefore, he submits that the authorities werejustified in denying the benefit of deduction relying on thestatutory provision. — 18. The Apex Court had an occasion to consider the|etfect of Circulars under Section 119 of the Act in the case oft UNION OF INDIA AND ANOTHER vs AZADI BACHAO|ANDOLAN AND ANOTHER, 263 ITR 706,where it is held as |under:- “Effect of circular under Section 119: Much of the argument centred around the effect ofthe circular issued by the Central Board of DirectTaxes under Section 119 of the Act and itsbinding nature. 18. The Apex Court had an occasion to consider the|etfect of Circulars under Section 119 of the Act in the case oft UNION OF INDIA AND ANOTHER vs AZADI BACHAO|ANDOLAN AND ANOTHER, 263 ITR 706,where it is held as |under:- “Effect of circular under Section 119: Much of the argument centred around the effect ofthe circular issued by the Central Board of DirectTaxes under Section 119 of the Act and itsbinding nature. section 119, strategically placed in Chapter|XITT which deals with 'Income-Tax Authorities’ isan enabling power of the CBDT, which isrecognised as an authority under the Income-taxAct under section 116(a). The CBDT under thissection is empowered to issue such orders,instructions and directions to other tncome-taxauthorities “as it may deem fit for properadministration of this Act". Such authorities andall other persons employed in the execution of thisAct are bound to observe and follow such orders,instructions and directions of the CBDT. TheProvisoto|Sub-section(1)|ofsection119)recognises two exceptions to this power. First,that the CBDT cannot require any income-taxauthority to make a particular assessment or todispose of a particular case in a _ particulamanner. Second, is with regard to interferencewith the discretion of the Commissioner (Appeals)in exercise of his appellate functions. Sub-section(2) of Section 119 provides for the exerciseofpower in certain special cases and enables theCBDIT, tf it considers it necessary or expedient soto do for the purpose of proper and efficientmanagement of the work of assessment and collection of revenue, to issue general or specialorders in respect of any class of incomes of classof cases, setting forth directions or instructions as|to the guidelines, principles or procedures to befollowed by other income-tax authorities in thedischarge of their work relating to assessment orinitiating proceedings for imposition of penalties.The powers of the CBDT are wide enough toenable it to grant relaxation from the provisions ofseveral sections enumerated in clause (a). Suchorders may be published in the Official Gazette inthe prescribed manner, if the CBDT is of theopinion that it is so necessary. The only bar onthe exercise ofpower is that it is not prejudicial tothe assessee. We are not concerned with theprovisions in clauses (b) and (c) in the presentappeals. In K.P. Varghese v. Income-Tax Officer,|Ernakulam [1981 131 ITR S97/(SC, it waspointed out by this Court that not only are thecirculars and instructions, issued by the CBDT inexercise of the power under section 119, bindingOF|the|authoritiesadministeringthetaxdepartment, but they are also clearly in the O3 nature of contemporanea expositio furnishinglegitimate aid to the construction of the Acct. The Rule of contemporanea expositio is that|"administrativeconstruction(Le. |contemporaneousconstructionplacedbyadministrative or executive officers charged withexecuting a Statute) generally should be clearlywrong before it is overturned; such a constructioncommonly referred to as practical construction,although non- controlling, is nevertheless entitled|to considerable weight, it is highly persuasive."(CrawfordOnlStatutoryconstruction,1940,_edition, as in supra note 13). Thevalidity ofthisprincipleWasSrecognised in Baleshwar Bagarti v. BhagirathtDass [1908 ILR 35 Cal 701, 713/, where theCalcutta High Court stated the rule in thefollowing words : "Tt 1Sawell-settledprincipleofinterpretation that courts in construing a statutewill give much weight to the interpretation putupon it, at the time of its enactment and since, bythose whose duty it has been to construe, executeand apply it.") The statement of this rule has also been|quotedwithapprovalbythisCourtin|Deshbandhu Gupta & Company v. Delhi StockExchange Association Ltd [1979 (4) SCC 565/ .| Thevalidity ofthisprincipleWasSrecognised in Baleshwar Bagarti v. BhagirathtDass [1908 ILR 35 Cal 701, 713/, where theCalcutta High Court stated the rule in thefollowing words : "Tt 1Sawell-settledprincipleofinterpretation that courts in construing a statutewill give much weight to the interpretation putupon it, at the time of its enactment and since, bythose whose duty it has been to construe, executeand apply it.") The statement of this rule has also been|quotedwithapprovalbythisCourtin|Deshbandhu Gupta & Company v. Delhi StockExchange Association Ltd [1979 (4) SCC 565/ .| In K.P. Varghese this Court held that thecirculars of the CBDT issued in exercise of itspower under section 119 are legally binding onthe revenue and that this binding characterattaches to the circulars (page 612) "even if theybe found not in accordance with the correctinterpretation of sub-section (2) and they departor deviate from such construction." Navnit Lal C. Javeri v. K.K.Sen, AAC [196556 ITR 198/(SC) and Ellerman Lines Ltd vs CIT{1971 82 ITR 193] (SC) clearly establish theprinciple that circulars issued by the CBDT undersection 119 of the Act are binding on all officersand employees employed in the execution of theAct, even lf they deviate from the provisions of the|Acct. In UCO Bank v. Commissioner of Income-Tax [1999 257 ITR 889, 896/, dealing with thelegal status of such circulars, this Court observed: “Such instructions may be by way of)relaxation of any of the provisions of the sectionsspecified there or otherwise. The Board thus haspower, inter alia, to tone down the rigour of thelaw and ensure a fair enforcement of itsprovisions, by issuing circulars in exercise of its|Statutory powers under section 119 of theIncome-taxActwhicharebindingOTFtheauthorities in the administration of the Act. UndersectionL19(2)however,thecircularsas|contemplated therein cannot be adverse to theassessee. Thus the authority which wields thepower for its own advantage under the Act isgiven the right to forgo the advantage whenrequired to wield it in a manner it considers justby relaxing the rigour of the law or in otherpermissible manners as laid down in section 119.The power is given for the purpose ofjust, properand efficientmanagement of the work ofassessment and in public interest. It is abeneficial power given to the Board for properadministration of fiscal law so that unduehardship may not be caused to the assessee andthe fiscal laws may be correctly applied. Hardcases which can be properly categorised as 22 belonging to a class, can thus be given the benefitof relaxation of law by issuing circulars bindingon the taxing authorities." In CIT v. Anjum M.H.Ghaswala [2001 252ITR I/(SC) it was pointed out that the circularsissued by CBDT under Section 119 of the Acthave statutory force and would be binding onevery income-tax authority although such may notbe the case with regard to press releases issueby the CBDTfor information of the public. | In Collector of Central Excise v. DhirenChemical Industries [2002 254 ITR 554], thisCourt,interpretingthe.phrase‘appropriate’,observed: (page 130 of 2 SCC):| "We need to make it clear that, regardlessof the interpretation that we have placed on thesaid phrase, if there are circulars which havebeen issued by the Central Board of Excise andCustoms which place a different interpretationupon the said phrase, that interpretation will bebinding upon the Revenue.” oT 19. The Apex Court in the case ofSTATE OF KERALAAND OTHERS vs KURIJAN ABRAHAM PVT. LTD ANDANOTHER, [2008] 303 ITR 284 (SC) interpreting Section119 (1) of the Act held as under :- In Collector of Central Excise v. DhirenChemical Industries [2002 254 ITR 554], thisCourt,interpretingthe.phrase‘appropriate’,observed: (page 130 of 2 SCC):| "We need to make it clear that, regardlessof the interpretation that we have placed on thesaid phrase, if there are circulars which havebeen issued by the Central Board of Excise andCustoms which place a different interpretationupon the said phrase, that interpretation will bebinding upon the Revenue.” oT 19. The Apex Court in the case ofSTATE OF KERALAAND OTHERS vs KURIJAN ABRAHAM PVT. LTD ANDANOTHER, [2008] 303 ITR 284 (SC) interpreting Section119 (1) of the Act held as under :- HLQ.|OneTrlLOaspectneedstobe|mentioned. Provisions of Section 3(1A) are similarto the provisions of Section 119(1) of the Income-tax Act, 1961 ("1961 Act") inasmuch as both thesections have used the expression "for the properadministration of this Act". According to the Lawof Income-tax by Kanga and Palkivala, the Boardis entrusted with the power to give effect to theprovisions of the Act and to provide "fair and justadministration" in the matter of imposition andcollection of tax. This is where it becomes theincumbentduty oftheBoardTograntadministrative relief in appropriate cases. In such|exercise, incidentally the Board has to considerthe effect of the items enumerated in the Entry.Therefore, it is not open to the State Governmentto contend that the Board in this case hadentered into an area which is earmarked for thelegislature/executive. In our view, the saidcirculargrantsadministrativereliefTo|the IS business. It was entitled to do so. Therefore, itcannot be said that the Board had acted beyond|its authority in issuing the said circular. One morereason needs to be stated. Whenever such'binding circulars are issued by the Boardgrantingadministrative relief(s)DuSINeSSarranges its affairs relying on such circulars.Therefore, as long as the circular remains in force,it is not open to the subordinate officers tocontend that the circular is erroneous and notbinding on them.” 20. From the aforesaid judgments referred to by the|Apex Court it is clear that, the CBDT under this section isempowered to issue such orders, instructions and directionsto other income-tax authorities ‘as it may deem fit for properadministration of this Act". Such authorities and all otherpersons employed in the execution of this Act are bound toobserve and follow such orders, instructions and directionsof the CBDT. The powers of the CBDT are wide enough toenable it to grant relaxation from the provisions of severalsections enumerated in clause (a). The only bar on the exercise of power is that it is not prejudicial to the assessee.The circulars issued by the CBDT issued under section 119of the Act are legally binding on the officers and employeesemployed in the Section and even if they deviate from suchconstruction. Such instructions may be by way of relaxationof any of the provisions of the sections specified there orotherwise. The Board has the power, to tone down the rigourof the law and ensure a fair enforcement of its provisions.The authority which wields the power for its own advantageunder the Act is given the right to forgo the advantage whenrequired to wield it in a manner it considers just by relaxingthe rigour of the law or in other permissible manners as laiddown in section 119. The power is given for the purpose ofjust, proper and efficient management of the work ofassessment and in public interest. It is a beneficial powersiven to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee andthe fiscal laws may be correctly applied. Hard cases whichcan be properly categorised as belonging to a class, can thus be given the benefit of relaxation of law by issuing circularsbinding on the taxing authorities. It is trite a law as long asan authority has power which is traceable to a source, themere fact that the source of power is not enacted in aninstruction does not render the instruction invalid. be given the benefit of relaxation of law by issuing circularsbinding on the taxing authorities. It is trite a law as long asan authority has power which is traceable to a source, themere fact that the source of power is not enacted in aninstruction does not render the instruction invalid. 21. Section 119 of the Act confers power on the Boardto issue instructions to subordinate authorities. ‘The|instructions may be in the nature of orders, instructions anddirections to other income tax authorities, the purpose of thesame is proper administration of the Act. Once such|instructions, orders or directions are issued, all authorities.and persons employed in the Section of the Act shall observeand follow them. In the instant case Circular No. 7/2003 isissued by way of an explanatory note on provisions relating|to direct taxes with reference to Finance Act, 2003. The|introduction provides that the Finance Act, 2003 is passed|by the Parliament, received the assent of the President on|14.5.2003 and it has been enacted as Act No. 32/2003. The. object of the circular is to explain the substance of theprovisions of the Act relating to direct taxes. Thisexplanation is meant for all the subordinate authorities for|the purpose of proper administration of the Act and thesame is binding on all of them and they shall follow andobserve such orders. It is by way of explanation whilerationalizing the provisions relating to assessment of firms itis made clear that, only in the event of a best judgmentassessment is made for failure to comply with Section 144 ofthe Act, the benefit which is available to a firm under Section28 of the Act can be denied. If a best judgment assessmentunder Section 144 of the Act is not made, no disallowanceunder Section 184(5) of the Act, can be made. No doubt thisexplanatory note is not in conformity with Section 184 (5) ofthe Act. But, when the CBDT issued the said explanatorynote, it is giving relaxation and benefit to the assessee whichthe statute has not provided. Such a power is vested in theCBDT by virtue of Section 119. Once such a benefit isconferred by way of a circular, the authorities are bound by the same. They cannot sit in judgment over the saidexplanation and deny the benefit to the assessee. Eventhough this Court can interpret the said provision and notethat there is inconsistency between the provision and theexplanation offered, but when the CBDT issued such|instruction granting that benefit to the assessee that has tobe respected. In that view of the matter, the approach of thethree authorities in denying the benefit to the assessee wasnot justified. It is contrary to the said explanation found inthe circular which the CBDT wanted to extend to theassessee in order to overcome the hardship by virtue of thesaid statutory provision. Therefore, the impugned orderscannot be sustained. 22. It was also contended that, when the partnership|deed was not enclosed to the return filed, there is non-compliance of Section 184 (2) of the Act and, therefore, theconsequences mentioned in Section 184 has to follow. But,it is on record before the assessment, a partnership deedduly certified and signed by all the partners were produced before the assessing authority. Therefore, there issubstantial compliance with sub-section (2) of Section 184 ofthe Act. As could be seen from the language employed insection 185, if there is non-compliance with the provisions ofsection 184, the firm shall be so assessed and no deductionwould be granted. In other words it is at the time ofassessment, if the authority is not given the partnershipdeed, the firm would be given the benefit. But, at the time ofassessment, if the partnership deed was produced, certainlythe authorities have to look into the partnership deed and ifit is a firm which satisfies the other requirements, then thefirm would be entitled to other benetits. Under suchcircumstances, Section 185 is not attracted. Seen from anyangle, the impugned orders passed by the authorities cannotbe sustained. Accordingly, we pass the following order :-